The carrying value of the Company’s borrowings is a reasonable estimate of its fair value as borrowings under the Company’s credit facility reflect currently available terms and conditions for similar debt.
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of September 30, 20152016 and March 31, 2015.2016. As required by ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
The Company adopted the guidance of ASC 815 “Derivative and Hedging”, which requires that we mark the value of our warrant liability to market and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant. The fair value of the warrants prior to the quarter ended December 31, 2014 was calculated using the Black-Scholes valuation model.
The following table provides a summary of the changes in fair value of our Level 3 financial liabilities from March 31, 20152016 through September 30, 2015,2016, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to the liability held at September 30, 2015:2016:
The common stock warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign corporation. The warrants do not qualify for hedge accounting, and, as such, all changes in the fair value of these warrants are recognized as other income/expense in the statement of operations until such time as the warrants are exercised or expire. Since these common stock warrants do not trade in an active securities market, the Company recognized a warrant liability and estimated the fair value of these warrants using the Black-Scholes options model using the following assumptions until the payment of the loan in November 2014.
With the payment of the loan in November 2014, the holder has the right, exercisable at any time, in writing (the “Warrant Put Notice”), to cause the Company, subject to the terms and conditions hereof, to purchase from the holder all, or any portion, of the warrant for the warrant put repurchase price (the “Repurchase Price”). The Repurchase Price is the greater of 1) Adjusted EBITDA (as defined below) per share as of the date of the Warrant Put Notice, less $0.01, multiplied by the number of warrants or 2) the product of the current market price per share as of the date of the Warrant Put Notice, less the purchase price of the warrant or warrants, multiplied by the number of warrants, if this amount is higher. “Adjusted EBITDA” means EBITDA, multiplied by 5, plus cash and cash equivalents less unpaid debt divided by the number of shares outstanding on a fully diluted basis. As such,
Certain prior year and period amounts have been reclassified to conform to the current period presentation.
On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court, Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army (the “Award”), to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5. Aeroflex’s petition alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with its business relationship; conspired to harm Aeroflex and tortiously interfered with its contract and seeks injunctive relief and damages. The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology and confidential information in winning the Award. In February 2009, subsequent to the Company winning the Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed Aeroflex proprietary technology in winning the Award, and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.
In December 2009, the Kansas District Court dismissed the Aeroflex Action on jurisdiction grounds. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the Kansas District Court for further proceedings.
Other than the matters outlined above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of executive officers of our Company, threatened against or affecting our Company, or our common stock in which an adverse decision could have a material effect.
In May 2014, the FASB issued ASU 2014-09 that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In March 2016, the FASB issued ASU 2016-08 which further clarifies the guidance on the principal versus agent considerations within ASU 2014-09. In April 2016, the FASB issued ASU 2016-10 to expand the guidance on identifying performance obligations and licensing within ASU 2014-09. In May 2016, the FASB issued ASU 2016-12 to improve revenue recognition in the areas of collectability, presentation of sales tax and other similar taxes collected from customers, noncash consideration, contract modifications and completed contracts at transition. This standard isupdate also amends the disclosure requirements within ASU 2014-09 for entities that retrospectively apply the guidance. The latest amendments are intended to address implementation issues that were raised by stakeholders and discussed by the Revenue Recognition Transition Resource Group, and provide additional practical expedients. These standards are effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the new guidance to determine the impact, if any, it will have on its consolidated financial statements.
No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s condensed consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q and other reports filed by the Company from time to time with the SEC (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended March 31, 2015, filed with the SEC on June 25, 2015, relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
Overview
The Company continued the strong momentum in first half of fiscal year 2016 after finishing strong in the fourth quarter of last fiscal year. All three major programs are shipping at a consistent rate. Our legacy business also continues to be consistent. In August 2015, we received the Full Rate Production Release for the TS-4530A SETS from the U.S. Army. The Company shipped 30 TS-4530A SETS in the second quarter, but volume deliveries of TS-4530A SETS are not anticipated to commence until late in the third fiscal quarter which ends December 31, 2015.
During the six months ended September 30, 2015, the Company continued to its strong momentum, while exploring new opportunities which we believe will provide a basis for future growth.
· | Revenues increased 89% for the first six months of fiscal year 2016 as compared to the same period in the prior year. |
. | Revenues in the second quarter of fiscal year 2016 increased to $6.8 million as compared to only $3.6 million in the second quarter of fiscal year 2015. The second quarter of fiscal year 2016 was favorably impacted by increased shipments on the TS-4530A program to meet contractual requirements. It is not anticipated that revenues will remain at these levels in future quarters. |
· | Income from operations increased to $1,373,409 for the first six months of fiscal year 2016 as compared to a loss from operations of $531,288 for the same period in the prior year. |
· | Net income was $478,532 as compared to a net loss of $632,200 for the same periods. Net income for the first six months of fiscal year 2016 was negatively impacted by the change in the fair value of the warrants in the amount of $450,828. |
· | In March 2015, the Company received an order for an additional 21 CRAFT test sets from Lockheed Martin in the amount of $775,369 with shipment expected to take place in the second and third quarters ending September 30, 2015 and December 31, 2015, respectively. These units are to be used on the Joint Strike Fighter program (“JSF”) program. |
· | Introduction of the TR-36 Navigation/Communication Test Set, representing our first new production introduction into the commercial market in a few years. The TR-36 provides comprehensive ramp testing in a user-friendly, light weight high-precision instrument for rapid functional testing of VOR, LOC/GS, MB, and VHF COMM (AM/FM), ELT and EPIRB avionic equipment all in a weather proof package with color display. We believe this product with our competitive price will compete in this market. |
· | Pursuit of Foreign Military Sales (“FMS”) for its major products. |
· | Investment in new lightweight design for commercial and military customers that we hope will expand our product line and be very competitive. |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
This Quarterly Report on Form 10-Q and other reports filed by the Company from time to time with the SEC (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended March 31, 2016, filed with the SEC on June 29, 2016, relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
Overview
Management believes that the Company has built a very solid position in the Mode 5 IFF and TACAN test set market, and its existing contracts as well as the introduction of new products should result in solid revenues and profitability through fiscal year 2017. While our sales declined 17.7% to $10.4 million, our gross margin as a percentage of sales increased as a result of the higher pricing on CRAFT and the shipment of the TS-4530A SETS which yield a higher gross profit than the TS-4530A Kits. Gross margin percentage is expected to remain well below our historical 50% average for the current fiscal next year as the TS-4530A products were bid competitively at tight margins. Revenues should benefit from the TS-4530A SET production, but TS-4530A KITS production as well as the ITATS program have been completed. Our balance sheet remains strong, and we have paid off the warranty liability to BCA Mezzanine Fund LLP (”BCA”).
We have intensified our marketing efforts and increased our investment in research and development. We continue to emphasize the importance of capturing the majority share of the large IFF international market which we believe could generate substantial revenues starting in the 2017/2018 fiscal year timeframe, and we have been working with international partners to ensure that we are well-positioned in this market. We believe that we are well positioned as our CRAFT and TS-4530A flight-line test sets have been endorsed by the U.S. military and we have already delivered test sets into 20 international markets. The Company is starting to see a pick-up in international activity based on the January 1, 2020 deadline for Mode 5 compliance. The commercial avionics industry is undergoing a great deal of regulatory change including the requirement that all aircraft be equipped with ADS-B transponder as well as the introduction of new UAT navigation for the general aviation market. We believe that our new hand-held products, that we are planning to introduce by the end of this fiscal year, will generate increased market share at attractive gross margin levels. The Company is also targeting the extremely large commercial and military radio test set market which is many times the size of our traditional avionics test market. We are also working closely with our military customers on new potential market opportunities that will be needed to maintain our sales and profitability growth.
In May 2016, BCA exercised its “put option” wherein BCA is exercising its right to have the Company purchase the warrants for 236,920 shares from BCA. The value of the warrants for the 236,920 shares of the Company’s common stock at the time of exercise was $720,000. The Company paid this off in full from cash from operations in August 2016.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview (continued)
· | Engagement of our new partner, Blue Star Engineering and Electronics Ltd. (“Blue Star”). Blue Star will handle all the Company’s interests in India, Nepal, Sri Lanka, Maldives and Bangladesh for both General Aviation and Military markets. The market in this region represents a significant opportunity for the Company. |
· | As developments of our major programs are complete, engineering efforts have been directed to new product development, and we have a few new products in the pipeline, in addition to the recently introduced TR-36. |
· | Continue to explore opportunities worldwide. |
Overview (continued)
As such, we anticipate improvement in revenues and profitability in the future. The revenue increase from the TS-4530A and ITATS shipments have enhanced the Company’s liquidity position, thereby enabling the Company to pursue these opportunities.
At September 30, 2015, the Company’s backlog was approximately $19.7 million as compared to approximately $34.0 million at September 30, 2014.
In November 2014,On March 21, 2016, the Company entered into a loanline of credit agreement with Bank of America, which expires March 31, 2017. The line provides a bank for $1,200,000.revolving credit facility with borrowing capacity of up to $500,000. There are no covenants or borrowing base calculations associated with his line of credit. Interest on any outstanding balance is payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points. The proceeds fromCompany’s interest rate was 4.96% at September 30, 2016. The line is collateralized by substantially all of the loan were used to pay offassets of the Company. The Company has not made any borrowings against this line of credit. As of September 30, 2016, the remaining balanceavailability under this line is $500,000.
At September 30, 2016, the Company’s backlog was $7.5 million as compared to $11.6 million at March 31, 2016. For the first six months of fiscal year 2017, the loan with BCACompany had bookings in the amount of $1,153,109, including accrued interest$6.9 million. International Mode 5 orders represented less than $250,000 of $4,467. The term ofthis total, but orders for International Mode 5 units are expected to pick up in the loan is for 3 years and expires in November, 2017. Monthly payments are at $36,551 including interest at 6%.2017/2018 calendar year timeframe.
Based on existing backlog and recurring orders, existing cash, and the credit line from Bank of America, the Company believes that it will have adequate liquidity and backlog to fund operating plans for at least the next twelve months. Currently, the Company has no material future capital expenditure requirements. However, there can be no assurances that the Company will achieve revenue and profitability goals or will not require additional financing.
Results of Operations
Sales
For the three months ended September 30, 2015,2016, total net sales increased $3,230,716 (90.1%decreased $1,742,361 (25.6%) to $6,818,390$5,076,029, as compared to $3,587,674$6,818,390 for the three months ended September 30, 2014.
2015. Avionics government sales increased $3,302,024 (109.1%decreased $1,989,988 (31.5%) to $4,338,764 for the three months ended September 30, 2016, as compared to $6,328,752 for the three months ended September 30, 2015 as compared2015. The decrease in revenues is mostly attributed to $3,026,728the decrease in shipment of the TS-4530A KITS, CRAFT and ITATS units associated with the U.S. Navy programs, which contracts have now been completed. This decrease is partially offset by the shipment of the TS-4530A SETS and CRAFT units sold to Lockheed Martin for the Joint Strike Fighter (“JSF”) program and to other customers. Commercial sales increased $247,627(50.6%) to $737,265 for the three months ended September 30, 2014. The increase in revenues is mostly attributed to the increase in shipments of the AN/USM-708 test set , TS-4530A KITS and SETS and the AN/ARM-206 test set associated with the Company’s three major programs CRAFT, TS-4530A and ITATS.
Commercial sales decreased $71,308 (12.7%)2016 as compared to $489,638 for the three months ended September 30, 2015 as compared2015. This increase is attributed to $560,946 for the three months ended September 30, 2014. A decrease in revenues fromincreased sales of the TR-220 was partially offset by an increase in sales from calibration and repairs.our recently introduced TR-36.
For the six months ended September 30, 2015,2016, total net sales increased $5,947,559 (88.5%decreased $2,245,911 (17.7%) to $12,664,309$10,418,398, as compared to $6,716,750$12,664,309 for the six months ended September 30, 2014
2015. Avionics government sales increased $6,042,620 (108.9%decreased $2,379,687 (20.5%) to $9,210,384 for the six months ended September 30, 2016, as compared to $11,590,071 for the six months ended September 30, 2015 as compared2015. The decrease in revenues is mostly attributed to $5,547,451the decrease in shipment of the TS-4530A KITS, CRAFT and ITATS units associated with the U.S. Navy programs, which contracts have now been completed. These decrease partially offset by the shipment of the TS-4530A SETS and CRAFT units sold to Lockheed Martin for the Joint Strike Fighter (“JSF”) program and to other customers. Commercial sales increased $133,776 (12.5%) to $1,208,014 for the six months ended September 30, 2014. The increase in revenues is mostly attributed to the increase in shipments of the AN/USM-708 test set , TS-4530A KITS and SETS and the AN/ARM-206 test set associated with the Company’s three major programs CRAFT, TS-4530A and ITATS.
Commercial sales decreased $95,061 (8.1%)2016 as compared to $1,074,238 for the six months ended September 30, 2015 as compared2015. This increase is attributed to $1,169,299increased sales of the TR-220 and our recently introduced TR-36 Nav/Comm test set.
Gross Margin
Gross margin decreased $417,878 (18.6%) and $356,520 (8.8%) to $1,825,588 and $3,702,241, respectively, for the three and six months ended September 30, 2014. A decrease in revenues from the TR-220 was partially offset by an increase in sales from calibration and repairs.
Gross Margin
Gross margin increased $1,374,122 (158.1%) and $2,069,200 (104.0%)2016 as compared to $2,243,466 and $4,058,761, respectively, for the three and six months ended September 30, 2015 as compared to $869,344 and $1,989,561, respectively, for the three and six months ended September 30, 2014.2015. This increasedecrease is mostly attributed to the increaselower volume offset partially by increased prices on CRAFT and the change in volume of sales especially for the CRAFT, TS-4530A and ITATS programs.mix. The gross margin percentage for the three months ended September 30, 20152016 was 32.9%36.0%, as compared to 24.2%32.9% for the three months ended September 30, 2014.2015. The gross margin percentage for the six months ended September 30, 20152016 was 32.0%35.5%, as compared to 29.6%32.0% for the six months ended September 30, 2014.2015.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations (continued)
Operating Expenses
Selling, general and administrative expenses increased $223,842 (33.9%decreased $8,738 (1.0%) to $875,138 for the three months ended September 30, 2016, as compared to $883,876 for the three months ended September 30, 2015, as compared2015. This decrease was primarily attributed to $660,034lower salaries and accrued profit sharing expense mostly offset by the increase in legal expenses associated with the Aeroflex Wichita, Inc. (“Aeroflex”) litigation. Litigation and expert witness expenses associated with the Aeroflex action were $188,126 for the three months ended September 30, 2014. This increase was primarily attributed to higher commissions, accrued bonus compensation, and litigation expenses and professional fees. Legal expenses associated with the Aeroflex litigation were $107,781 for the three months ended September 30, 20152016 as compared to $72,162$107,781 for the same period last year.
Selling, general and administrative expenses increased $210,337 (13.7%$37,318 (2.1%) to $1,786,882 for the six months ended September 30, 2016, as compared to $1,749,564 for the six months ended September 30, 2015, as compared to $1,539,2272015. This increase was primarily attributed by the increase in legal expenses associated with the Aeroflex litigation partially offset by lower salaries and accrued profit sharing expense. Litigation expenses associated with the Aeroflex action were $326,840 for the six months ended September 30, 2014. This increase was primarily attributed to higher commissions and accrued bonus compensation offset partially by lower litigation expenses and professional fees. Legal expenses associated with the Aeroflex litigation were $178,152 for the six months ended September 30, 20152016 as compared to $219,171$178,152 for the same period last year.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Results of Operations (continued)
Operating Expenses (continued)
Engineering, research and development expenses decreased $54,070 (10.9%increased $140,115 (31.6%) and $45,834 (4.7%$232,860 (24.9%) to $583,771 and $1,168,648, respectively, for the three and six months ended September 30, 2016, as compared to $443,656 and $935,788, respectively, for the three and six months ended September 30, 2015 as compared2015. The Company continues to $497,726invest in new products by taking advantage of our CRAFT and $981,622, respectively,TS-4530A technology to develop smaller hand-held products in the next 12 months, which will broaden our product line for both commercial and military applications. We introduced a new commercial Nav/Comm test set earlier this calendar year. Based on customer feedback, we have upgraded the capabilities of this unit and have started to ship production units to customers. This is a large and important market segment for the threeCompany, and six months ended September 30, 2014. While the Company has completed development on its major programs,we are optimistic that this new product will help us regain market share in this segment. We have added additional personnel to research and development resources have now been focused on new product development, sustaining engineering and enhancementsactivities to existing products.accelerate our time to market.
Income (Loss) Fromfrom Operations
As a result of the above, the Company recorded income from operations of $366,679 and $746,711, respectively, for the three and six months ended September 30, 2016, as compared to income from operations of $915,934 and $1,373,409, respectively, for the three and six months ended September 30, 2015 as compared to losses from operations of $288,416 and $531,288, respectively, for2015.
Other Income (Expense), Net
For the three and six months ended September 30, 2014.
Other Income (Expense), Net
For the three months ended September 30, 2015,2016, total other expenseincome was $545,781$15,136 and $213,157, respectively, as compared to other expense of $86,727$545,781 and $509,012 for the three and six months ended September 30, 2014.2015. This changeincrease in other income is primarily due to the non-cash lossgain of $518,588 on the change in the valuation of common stock warrants for the three months ended September 30, 2015 as compared to a gain of $27,801significantly higher loss on the change in the valuation of common stock warrants infor the same period in the prior year. Interest expense declined as a result of the lower interest rate on the new loan and the lower outstanding loan balance. Amortization of deferred financing charges and debt discount were lower as a result of the repayment of the loan with BCA, as these remaining expenses were recorded as a loss on the extinguishment of debtperiods in the prior fiscal year.
For the six months ended September 30, 2015, total other expense was $509,012 as compared to other expense of $341,042 for the six months ended September 30, 2014. This change is primarily due to the non-cash loss of $450,828 on the change in the valuation of common stock warrants for the six months ended September 30, 2015 as compared to a loss of $106,080 in the valuation of common stock warrants in same period in the prior year. Interest expense declined as a result of the lower interest rate on the new loan and the lower outstanding loan balance. Amortization of deferred financing charges and debt discount were lower as a result of the repayment of the loan with BCA, as these remaining expenses were recorded as a loss on the extinguishment of debt in the prior fiscal year.
Income (Loss) before Income Taxes
As a result of the above, the Company recorded income before taxes of $381,815 and $959,868, respectively, for the three and six months ended September 30, 2016, as compared to income before taxes of $370,153 and $864,397, respectively, for the three and six months ended September 30, 2015 as compared to losses before income taxes of $375,143 and $872,330, respectively, for the three and six months ended September 30, 2014.2015.
Income Tax Provision/Benefit
For the three and six months ended September 30, 2015,2016, the Company recorded an income tax provisions of $109,760 and $277,504, respectively, as compared to an income tax provisions of $170,687 and $385,865, respectively, as compared to income tax benefits of $126,948 and $240,130, respectively, for the three and six months ended September 30, 2014.2015. The Company recorded a provision for income taxes as a result of the Company recordedrecording a profit before taxes. It should be noted that as a result of the Company’s net operating loss carryforwards, it will not be paying significant taxes this year, and, as such, the provision for taxes represents a reduction of our deferred tax asset and not a liability to pay taxes.
Net Income
As a result of the above, the Company recorded net income of $272,055 and $682,364, respectively, for the three and six months ended September 30, 2016, as compared to net income of $199,466 and $478,532, respectively, for the three and six months ended September 30, 2015.
Liquidity and Capital Resources
At September 30, 2016, the Company had net working capital of $3,922,246 as compared to $4,043,639 at March 31, 2016. Working capital continues to be strong even after paying the $720,000 warrant liability.
During the six months ended September 30, 2016, the Company’s cash balance decreased by $142,099 to $830,534. The Company’s principal sources and uses of funds were as follows:
Cash provided by operating activities. For the six months ended September 30, 2016, the Company generated $846,851 in cash for operations as compared to generating $952,069 in cash for operations for the six months ended September 30, 2015. This decrease in cash from operations is the result of the increase in accounts receivable, lower operating income and decrease in accrued payroll, vacation pay and payroll taxes offset partially by the increase in deferred revenues and decrease in inventories.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations (continued)
Net Income (Loss)
As a result of the above, the Company recorded net income of $199,466 and $478,532, respectively, for the three and six months ended September 30, 2015 as compared to net losses of $248,195 and $632,200 for the three and six months ended September 30, 2014.
Liquidity and Capital Resources (continued)
At September 30, 2015, the Company had net working capital of $3,642,138 as compared to $2,599,117 at March 31, 2015. This change is primarily the result of the increase in cash, accounts receivable and inventories partially offset by the increase in accounts payable and accrued expenses.
During the six months ended September 30, 2015, the Company’s cash balance increased by $609,461 to $795,393. The Company’s principal sources and uses of funds were as follows:
Cash provided by operating activities. For the six months ended September 30, 2015, the Company provided $952,069 in cash for operations as compared to providing $377,530 in cash for operations for the six months ended September 30, 2014. This increase in cash from operations is the result of the improvement in income from operations offset partially by an increase in accounts receivable and decrease in accounts payable and accrued expenses as well as a decrease in the Company’s deferred tax asset.
Cash used in investing activities. For the six months ended September 30, 2015,2016, the Company used $35,772$30,303 of its cash for investinginvestment activities, as compared to $6,511$35,772 for the six months ended September 30, 20142015 as a result of an increasea decrease in the purchase of capital equipment.
Cash used in financing activities. For the six months ended September 30, 2015,2016, the Company used $306,836$958,647 in financing activities as compared to using $359,991$306,836 for the six months ended September 30, 20142015 primarily as a result of lower capital lease obligations. The Company paid down $125,000paying the warrant liability of its notes to related parties. Repayments of long-term debt decreased as a result of the refinancing with Bank of America in November 2014.$720,000.
In November 2014, the Company entered into a term loan agreement with a bank for $1,200,000. The proceeds from the loan were used to pay off the remaining balance of the loan with BCA in the amount of $1,153,109, including accrued interest$1,200,000 with Bank of $4,467.America. The term of the loan is for 3 yearthree years, and expiresmatures in November 2017. Monthly payments are at $36,551 including interest at 6%. The term loan is collateralized by substantially all of the assets of the Company. At September 30, 2016 and March 31, 2016, the outstanding balances were $492,810 and $693,407, respectively. At September 30, 2016, $420,258 was classified as current.
In July 2015, the Company entered into a term loan in the amount of $18,000 with Bank of America. The term loan is for three years, and matures in July 2018. Monthly payments are at $536 including interest at 4.5%. The term loan is collateralized by substantially all of the assets of the Company. At September 30, 2016 and March 31, 2016, the outstanding balances were $11,293 and $14,211, respectively. At September 30, 2016, $6,043 was classified as current.
In March 2014, the Company entered into a loan with Ford Credit to purchase a van for the Company in the amount of $23,712. Such note has a term of five (5) years with an annual interest rate of 8.79% and monthly payments of $492. The outstanding balances at September 30, 2016 and March 31, 2016 were $12,873 and $15,197, respectively. At September 30, 2016, $4,964 was classified as current.
On March 21, 2016, the Company entered into a line of credit agreement with Bank of America, which matures on March 31, 2017. The line provides a revolving credit facility with borrowing capacity of up to $500,000. There are no covenants or borrowing base calculations associated with this line of credit. Interest on any outstanding balance is payable monthly at an annual interest rate equal to the LIBOR (London Interbank Offered Rates) Daily Floating plus 3.75 percentage points. The Company’s interest rate was 4.96% at March 31, 2016. The line is collateralized by substantially all of the assets of the Company. The Company has not made any borrowings against this line of credit. As of June 30, 2016, the remaining availability under this line is $500,000.
In May 2016, BCA exercised its “put option” wherein BCA is exercising its right to have the Company purchase the warrants for 236,920 shares from BCA (see Notes 10 in Notes to Condensed Consolidated Financial Statements). The value of the warrants for the 236,920 shares of the Company’s common stock at the time of exercise was $720,000. The Company paid this amount from cash from operations in August 2016.
Based on existing backlog and expected production releases,recurring orders, existing cash, and the credit line from Bank of America, the Company believes that it will have adequate liquidity and backlog to fund operating plans for at least the next twelve months. Currently, the Company has no material future capital expenditure requirements. However, there can be no assurances that the Company will achieve revenue and profitability goals or will not require additional financing.
There was no significant impact on the Company’s operations as a result of inflation for the sixthree months ended September 30, 2015.2016.
These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015,2016, filed with the SEC on June 25, 201529, 2016 (the “Annual Report”).
Off-Balance Sheet Arrangements
As of September 30, 2015,2016, the Company had no material off-balance sheet arrangements.
Critical Accounting Policies
Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the Fiscal Year 20152016 consolidated financial statements included in our Annual Report.
ItemItem 3. Quantitative and Qualitative Disclosures about Market Risk.
We do not hold any derivative instruments and do not engage in any hedging activities.
ItemItem 4. Controls and Procedures.
(a) (a) | Evaluation of Disclosure Controls and Procedures |
The Company's Chief Executive OfficerCompany, including its principal executive officer and the Company's Principal Financial Officer have evaluatedprincipal financial officer, conducted an evaluation of the effectiveness of the Company'sdesign and operation of its disclosure controls and procedures, (asas defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act)Act of 1934 (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q.report (the “Evaluation Date”). Based upon suchthe evaluation, the Chief Executive Officerour principal executive officer and Principal Financial Officerprincipal financial officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company'sEvaluation Date that our disclosure controls and procedures were not effective aseffective. Disclosure controls are controls and procedures designed to reasonably ensure that information required under Rules 13a-15(e) and 15d-15(e)to be disclosed in our reports filed under the Exchange Act, such as a result ofthis report, is recorded, processed, summarized and reported within the material weaknesstime periods specified in the Company’s internal control over financial reporting previously disclosed under Item 9A of the Company’s Annual Report.
The Company is actively engaged in implementing the remediation efforts described in the Company’s Annual Report which are designed to address this material weakness. While progress has been made, additional time is needed to fully implementSEC’s rules and demonstrate the effectiveness of the remediation efforts. The Company is committed to designing, implementing and operating effectiveforms. Disclosure controls and management continues to regularly assess the progress and sufficiency of the ongoing initiatives and make adjustments as and when necessary.
Notwithstanding the ineffectiveness of the Company’s disclosureinclude controls and procedures designed to reasonably ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as of the end of the period covered by this Quarterly Report on Form 10-Q and the material weakness in our internal control over financial reporting that existed as of that date, management believes that (i) this Quarterly Report on Form 10-Q does not contain any untrue statement of a material fact or omitappropriate to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this Quarterly Report on Form 10-Q and (ii) the unaudited condensed consolidated financial statements, and other financial information, included in this Quarterly Report on Form 10-Q fairly present in all material respects in accordance with GAAP our financial condition, results of operations and cash flows as of, and for, the dates and periods presented.allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
The Company, is taking actions to remediateincluding its principal executive officer and principal accounting officer, reviewed the material weakness related to itsCompany’s internal control over financial reporting, as described above. Other thanpursuant to Rule 13(a)-15(e) under the changes disclosed above,Exchange Act and concluded that there werewas no material changeschange in ourthe Company’s internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(e) and 15d-15(e) under the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-QCompany’s most recently completed fiscal quarter that havehas materially affected, or areis reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.
Inherent Limitations of Internal Controls
The Company’s management, including the Chief Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II – OTHER INFORMATION
ItemItem 1. Legal Proceedings.
On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court, Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army (the “Award”), to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5. Aeroflex’s petition alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with its business relationship; conspired to harm Aeroflex and tortiously interfered with its contract and seeks injunctive relief and damages. The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology and confidential information in winning the Award. In February 2009, subsequent to the Company winning the Award, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the U.S. Army Contracts Attorney and the U.S. Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed Aeroflex proprietary technology in winning the Award, and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.
In December 2009, the Kansas District Court dismissed the Aeroflex Action on jurisdiction grounds. Aeroflex appealed this decision. In May 2012, the Kansas Supreme Court reversed the decision and remanded the Aeroflex Action to the Kansas District Court for further proceedings.
On May 23, 2016, the Company filed a motion for summary judgment based on Aeroflex’s lack of jurisdictional standing to bring the case. The motion asserts that Aeroflex does not own the intellectual property at issue since it is a bare licensee of Northrop Grumman. Northrop Grumman had declined to join this suit as a plaintiff. As such, it is our contention that Aeroflex lacks standing to sue alone. Also, the motion raises the fact that in December 2011 Aeroflex allowed the license to expire, so that Aeroflex’s claims are either moot or it lacks standing to sue for damages allegedly accruing after the license ended. The Company has been engaged in discoverybelieves we have a solid legal position and depositionsthe summary judgement motion was heard on August 25, 2016. The Company is still waiting for a decision from the last three quarters, which has resulted in substantially higher legal expense.court on this motion. The August 31, 2015June 2, 2016 Amended Supplemental Modified Scheduling Order has the trial date set for October 24, 2016February 13, 2017 and is estimated to last three weeks, but this date may be subject to postponement. The Company is optimistic as to the outcome of this litigation. However, the outcome of any litigation is unpredictable and an adverse decision in this matter could have a material adverse effect on our financial condition, results of operations or liquidity.
Other than the matters outlined above, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of executive officers of our Company, threatened against or affecting our Company, or our common stock in which an adverse decision could have a material effect.
ItemItem 1A. Risk Factors.
We believe there are no changes that constitute material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015,2016, filed with the SEC on June 25, 2015.29, 2016.
ItemItem 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of the Company’s equity securities during the quarter ended September 30, 20152016 other than those previously reported in a Current Report on Form 8-K.
ItemItem 3. Defaults upon Senior Securities.
There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.
ItemItem 4. Mine Safety Disclosures.
Not applicable.
ItemItem 5. Other Information.
There is no other information required to be disclosed under this item which was not previously disclosed.
Exhibit No. | | Description |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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101.INS | | XBRL Instance Document* |
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101.SCH | | Taxonomy Extension Schema Document* |
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101.CAL | | Taxonomy Extension Calculation Linkbase Document* |
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101.DEF | | Taxonomy Extension Definition Linkbase Document* |
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101.LAB | | Taxonomy Extension Label Linkbase Document* |
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101.PRE | | Taxonomy Extension Presentation Linkbase Document* |
* Filed herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | TEL-INSTRUMENT ELECTRONICS CORP. |
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Date: November 16, 20159, 2016 | | By: | /s/ Jeffrey C. O’Hara | |
| | | | Name: Jeffrey C. O’Hara | |
| | | | Title: Chief Executive Officer Principal Executive Officer | |
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Date: November 16, 20159, 2016 | | By: | /s/ Joseph P. Macaluso | |
| | | | Name: Joseph P. Macaluso | |
| | | | Title: Principal Financial Officer Principal Accounting Officer | |